Bernie Brookes is an optimist who has been forced by circumstances to become a pragmatist. After reporting an 8.8% decline in first half earnings, as foreshadowed, he’s not particularly optimistic about the outlook for the second half.
It has been obvious for quite some time that the last rise in official interest rates in November caused a structural change in consumer sentiment and a sharp fall off in household spending, with only a weak recovery at the start of this year.
Floods, cyclones, earthquakes, tsunamis, a cool summer and the debate about a carbon tax aren’t helping; nor is the growth of online retailing. The imminent entry of the disruptive Spanish fast-fashion chain Zara to this market is another potentially unsettling factor.
Brookes said today that sales had improved since January but were still behind the same time last year and that he expects conditions in the second half to remain “challenging”. After-tax profits were expected to be up to 5% below last year’s earnings.
A concern for Brookes and his peers would be that the subdued levels of consumer confidence and spending aren’t a temporary phenomenon but a longer term change to households’ behaviour.
Online retailing will continue to grow but at a more macro level the de-leveraging of households apparent since the financial crisis, which has driven the sales declines, might have some way to go.
The views of Guy Debelle, the assistant governor of the Reserve Bank, financial markets, would be disconcerting for retailers generally. He believes the contraction in the growth rate of household and business credit might be sustained for some time to come.
Myer has responded to the conditions by doing what it has demonstrated it is very good at – controlling costs, with the cash cost of business falling 0.4% in the half. That helped limit the damage done to earnings by the 3.5% fall in sales and enabled Myer to contain the erosion of its retail margin to a modest decline from 10.05% to 9.71%.
Underlying the result is also a pipeline of activity that ought to contribute positively to Myer’s numbers in future, most notably the re-opening of its flagship Bourke Street store, the recent refurbishment of three stores, with another four to come in this half and the continuing opening of new stores planned for the next few years.
The acquisition of a 65% stake in the fashion brand sass & bide, which has 15 stores of its own, the continuing addition of concession brands and the growth of its own private label brands give Brookes a growth dimension to point to. Myer is also upgrading its online presence.
While some of the developments in the pipeline will help boost sales and efficiency, however, none of them are game-changers. All Brookes and his team can do is manage the business tightly, squeeze incremental sales and profitability gains from it and wait and hope for some improvement in consumer sentiment and their willingness to spend on discretionary items.
This article first appeared on Business Spectator.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
